DCIT, CHENNAI vs. M/S. TIRUNELVELI VAYU ENERGY GENERATION PVT. LTD., CHENNAI

Both the appeals of the assessee and Revenue are directed against the very same order of the Commissioner of Income Tax (Appeals)-15, Chennai, dated 10.03.2016 and pertain to assessment year 2010-11.

Let’s first take assessee’s appeal in I.T.A.

The first issue arises for consideration is disallowance of `50,14,353/- being the expenditure incurred for the purpose of distribution of gifts to local people.

Shri V. Nagaprasad, the Ld. representative for the assessee, submitted that the assessee entered into an agreement with M/s PPN Power Generating Company Pvt. Ltd. for carrying out liaisoning services. As per the agreement, the assessee was expected to assist M/s PPN Power Generating Company Pvt. Ltd. in dealing with various statutory and non-statutory bodies. The assessee was also expected to negotiate with local people for ensuring smooth operation of the plant in the locality. According to the Ld. representative, the assessee claimed before the Assessing Officer that in order to maintain good relation with local people, the assessee has distributed gifts to the extent of `50,14,353/-.

Referring to the agreement, a copy of which is available at page 2 of the paper-book, the Ld. representative for the assessee submitted that unless the assessee gives some gifts to the local people, it may not be able to liaison properly and effectively so as to ensure that the plant of M/s PPN Power Generating Company Pvt. Ltd. is operating without any problem from local people. According to the Ld. representative, even though there was prohibition in the agreement for giving gift, loan, etc. to Government officials and political parties or the officers of the company or potential customers of the company, there was no prohibition for giving gift or loan to the local people who are not connected with either the assessee or M/s PPN Power Generating Company Pvt. Ltd. In the absence of any agreement prohibiting the assessee from giving gift to the local people, according to the Ld. representative, giving such gifts cannot be considered to be non-business purpose. The very business of the assessee is to liaison with local people. No doubt, there was prohibition in giving gifts to statutory and non-statutory authorities, however, there was no prohibition in giving such gifts to local people who are not connected either with the assessee or with M/s PPN Power Generating Company Pvt. Ltd. Therefore, according to the Ld. representative, the gifts given by the assessee is for the purpose of maintaining good relation with local people for smooth function of the plant and it has to be allowed as revenue expenditure.

On the contrary, Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that during the course of assessment proceeding, the Assessing Officer found that the assessee claimed purchase of paintings, sarees CD TV iron box, mobile phones, etc. which were given as gifts. On a query from the Assessing Officer, the assessee explained that to facilitate smooth functioning of plant in the village, it was necessary to maintain cordial relation with local people. Therefore, the assessee presented paintings, LCD TV, sarees, fitness machine, DVD player, iron box, etc. According to the Ld. D.R., the agreement with M/s PPN Power Generating Company Pvt. Ltd. clearly prohibits the assessee from offering gifts, loan to any Government official or any member of the political party or any person connected with the company, therefore, giving gift is totally prohibited as per this agreement. The assessee now claims that giving gift to the local people is not prohibited. As per the agreement, there was prohibition for giving gifts to any Government official whether in statutory or non-statutory bodies and employees of the company and to the potential customers. Therefore, the assessee cannot now claim that gift given to the local people is for the purpose of business. The Ld. D.R. further submitted that the assessee has not produced details of the gifts given to the local people, therefore, the Assessing Officer could not verify whether the gifts were, in fact, given to the local people. Therefore, according to the Ld. D.R., the CIT(Appeals) has rightly confirmed the addition made by the Assessing Officer.

We have considered the rival submissions on either side and perused the relevant material available on record. The assessee appears to have purchased gift articles to the extent of `50,14,353/- The assessee claims that sarees, fitness machine, DVD player, iron box were purchased and gifted to the local people so that M/s PPN Power Generating Company Pvt. Ltd. can operate its plant peacefully in the locality. The facts remains that the no material is available on record either for purchase of the so-called gift articles or for distribution of the same. In those circumstances, this Tribunal is of the considered opinion that the assessee has to produce necessary material for purchase of gift articles and distribution before the Assessing Officer. Unless it is proved that materials were purchased and distributed to the local people for the purpose of maintaining good relationship, the claim of the assessee cannot be allowed. Therefore, this Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer.

The next ground of appeal is with regard to disallowance made by the Assessing Officer under Section 40(a)(ia) of the Income-tax Act, 1961 (in short 'the Act').

We have heard Shri V. Nagaprasad, the Ld. representative for the assessee and Sh. P. Radhakrishnan, the Ld. Departmental Representative. The CIT(Appeals) confirmed the disallowance under Section 40(a)(ia) of the Act by following the judgment of Calcutta High Court in CIT v. Crescent Export Syndicate (2013) 216 Taxman 258, holding that Section 40(a)(ia) is applicable not only to the amount paid but also remains to be paid. Now the contention of the assessee before this Tribunal is that the decision of Special Bench of this Tribunal in Merilyn Shipping and Transport v. ACIT in 136 ITD 23 was confirmed by Allahabad High Court in Vector Shipping Services (P) Ltd. (2013) 357 ITR 642. It is also an admitted fact that Apex Court recently held that Section 40(a)(ia) is applicable not only to the amount paid but also the amount remains to be paid. In fact, the Apex Court upheld the judgment of Calcutta High Court in Crescent Export Syndicate (supra). In view of the above, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

The next ground of appeal is with regard to disallowance of `10,46,815/- being the expenditure towards air fare and payment to hotel accommodation.

On the contrary, Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that the assessee debited an amount of `10.62 lakhs under the head “Travelling Expenses”. On perusal of the details produced by the assessee, the Assessing Officer found that the payment was made to five star hotels like Park Hotels. The remaining balance amount was incurred towards air travel.

We have considered the rival submissions on either side and perused the relevant material available on record. The business of the assessee is to do liaison with statutory and non-statutory authorities for the purpose of smooth functioning of the plant put up by M/s PPN Power Generating Company Pvt. Ltd. The assessee claims that payment was made to star hotels like Park Hotels. It is not known why the payment was made to star hotels when the assessee was expected to do liaison work in the area where the plant was situated. Probably, the assessee or its employees may have to meet the Government officials for getting the required permission or license to carry on the business activity. The details of the persons who stayed in the hotels are not available on record.

The next ground of appeal is with regard to disallowance of `5,00,000/- being the expenditure incurred in making advertisement film, to spread awareness among the local people.

Shri V. Nagaprasad, the Ld. representative for the assessee, submitted that the assessee debited a sum of `5,00,000/- on account of advertisement film on which tax was not deducted.

We have heard Ld. Departmental Representative also. The Ld. D.R. submitted that the assessee has deducted tax at 2% on the payment made to M/s V.V. Communications for making advertisement film. According to the Ld. D.R., under Section 194J of the Act, tax has to be deducted at the rate of 5%, therefore, the Assessing Officer has rightly disallowed the claim of the assessee under Section 40(a)(ia) of the Act.

We have considered the rival submissions on either side and perused the relevant material available on record. Section 40(a)(ia) of the Act makes it clear that whenever the assessee has to deduct tax, the same has to be deducted at the time of making payment or giving credit. If there is a failure to deduct tax, then the expenditure cannot be allowed as deduction. In this case, it is not a case of non-deduction of tax. It is a case of short deduction. The assessee deducted 2% as TDS instead of 5%. Therefore, this Tribunal is of the considered opinion that the provisions of Section 40(a)(ia) of the Act may not be applicable in respect of short deduction. At the best, the Assessing Officer may disallow the proportionate amount to which tax was not deducted. Since this Tribunal is of the considered opinion that Section 40(a)(ia) of the Act cannot be made applicable when there was short deduction of tax, there cannot be any disallowance under Section 40(a)(ia) of the Act. Accordingly, the orders of the lower authorities are set aside. The addition made by the Assessing Officer is deleted.

The next ground of appeal is with regard to disallowance of interest to the extent of `35,66,880/-.

The next issue arises for consideration is with regard to disallowance of `49,33,541/- being the liaisoning service charges.

Shri V. Nagaprasad, the Ld. representative for the assessee, submitted that the assessee has paid liaisoning service charges at the rate of 6%. The Assessing Officer disallowed the payment of `49,33,541/- on the ground that the payment was made at the rate of 3% in earlier years. According to the Ld. representative, the payment of liaisoning service charges was not in dispute. Due to escalation of cost, the assessee was forced to pay the service charges at 6%, therefore, the Assessing Officer is not justified in saying that payment was in excess. According to the Ld. representative, the payment needs to be made as per market rate, therefore, the Assessing Officer is not justified in disallowing the claim of the assessee.

On the contrary, Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that in the earlier years, the payment was made at 3% and this year the assessee claims enhanced rate of 6%. In fact, the turnover of assessee was higher when compared to earlier years. According to the Ld. D.R., the only reason adduced by the assessee for increase in service charges was that the Director has spent more time. The Assessing Officer found that since the payment was made in excess to the payment made in the earlier years, according to the Ld. D.R., the same was disallowed.

We have considered the rival submissions on either side and perused the relevant material available on record. The payment of service charges is not in dispute. The Assessing Officer found that in earlier years, the service charges were paid only at the rate of 3%, therefore, the payment of service charges at 6% was excessive. No doubt, the service charges have to be paid at market rate. The assessee claims that due to escalation of charges, the service charges have to be paid at increased cost. When the assessee has paid service charges at the rate of market value, the same cannot be disallowed by the Assessing Officer. In the earlier years, similar service charges were paid to the Director at the rate of 3%. The rates are increasing day by day and cost of service was also increasing simultaneously. Therefore, the Assessing Officer cannot place reliance on the rate paid in the earlier assessment years. What is to be seen is whether the service was rendered by the Director and whether the assessee has paid at 6%. It is not in dispute that the Director has rendered service and payment was made to him at 6%. In view of the above, this Tribunal is of the considered opinion that the Assessing Officer is not justified in disallowing the claim of the assessee. Accordingly, the orders of the lower authorities are set aside and the addition of `49,33,541/- is deleted.

The next ground of appeal is with regard to disallowance of `10,45,753/- as against disallowance of `1,13,99,293/- made by the Assessing Officer.

Shri V. Nagaprasad, the Ld. representative for the assessee, submitted that the Assessing Officer found that the assessee was carrying on trading in shares on a large scale and on regular basis.

On the contrary, Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that the assessee in fact invested in the shares of more than 200 different companies. The assessee singled out one company’s shares, namely, M/s Apollo Hospital Enterprise Ltd. and claimed the same as investment. The profit on sale of shares of M/s Apollo Hospital Enterprise Ltd. was claimed as capital gain. According to the Ld. D.R., the Assessing Officer after taking into consideration material available on record and transactions of the assessee, found that it is only a business transaction.

We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee has invested in shares in more than 200 different companies. Other than M/s Apollo Hospital Enterprise Ltd., the assessee itself treated the profit on sale of shares as business profit. In respect of investments in some of the companies, the assessee claims as capital gain. Even though the assessee systematically engaged in purchase and sale of shares, the assessee can maintain two portfolios – one portfolio for business and another one for investments. In order to find out whether the assessee invested the funds in M/s Apollo Hospital Enterprise Ltd. as a trader or for investment, the intention of the assessee at the time of investment needs to be ascertained. When the law permits the assessee to maintain two portfolios, one for investment and another for business, this Tribunal is of the considered opinion that the Assessing Officer has to ascertain the intention of the assessee in investing money in the shares of M/s Apollo Hospital Enterprise Ltd. Since the intention of the assessee was not ascertained and brought on record, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the entire addition made by the Assessing Officer is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh after considering the material that may be filed by the assessee and thereafter decide the same in accordance with law, after giving a reasonable opportunity to the assessee.

Now coming to the Revenue’s appeal in I.T.A.

Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that the Assessing Officer disallowed the expenditure for earning exempt income by applying the provisions of Rule 8D.

On the contrary, Shri V. Nagaprasad, the Ld. representative for the assessee, submitted that the Madras High Court in Redington (India) Ltd. v. Addl. CIT (2017) 77 taxmann.com 257 found that the disallowance cannot be made on notional basis.

We have considered the rival submissions on either side and perused the relevant material available on record. The CIT(Appeals) found that the disallowance under Section 14A of the Act cannot exceed the exempt income, by placing reliance on the judgment of Delhi High Court in Joint Investment Pvt. Ltd. (supra).

In the result, the assessee’s appeal in is partly allowed for statistical purposes and the Revenue’s appeal in I.T.A. No.2647/Mds/2016 is dismissed.